Plan Complexity not a Significant Factor in Fees

In an analysis of fees in 401(k) and other defined contribution retirement plans, researchers found the level of complexity in servicing a plan did not appear to have a significant effect on fees.

The study shows that among the companies surveyed, the number of participants and the average participant account balance are the primary drivers of a plan’s “all-in” fee (Deloitte researchers calculated an “all-in fee,” a comprehensive measure of administrative, recordkeeping and investment-related fees, whether paid by the plan sponsor, the participant or the plan, as a percentage of plan assets). Specifically, plans with more participants and higher average account balances typically had lower all-in fees, benefitting from economies of scale by spreading fixed administrative costs over more assets and participants.  

The allocation of plan assets to equity investment options is also cited as a primary driver of plan fees in the analysis. Plans with higher allocations to equity investment options tended to have higher all-in fees as a percentage of plan assets, consistent with the fact that equity investment options generally have higher expenses than other types of investments.  

Three other factors also were found to be significant in explaining variation in defined contribution plan all-in fees. Plans with more investment options tended to have higher all-in fees than plans with fewer. On the other hand, plans with higher participant contribution rates or automatic enrollment tended to have lower all-in fees. 

However, variables including the number of payrolls and number of business locations that a plan sponsor has did not have a significant impact on fees. The study also examined, but found little fee impact resulting from the type of service provider (whether a mutual fund sponsor, life insurance company, bank, or third party administrator) or variables relating to the plan’s relationship with the service provider (such as tenure with the service provider, years since the last competitive review, or the percentage of assets invested in proprietary investments of the service provider).  

“As regulatory changes and increased scrutiny on fees affect these plans, this study provides both a framework for analysis as well as an understanding of the factors driving fees for a cross section of plans.” said ICI President and CEO Paul Schott Stevens.  

While any individual participant’s experience depends on the defined contribution plan offered by his or her employer, the median defined contribution plan participant is in a plan with an all-in fee of 0.78% of assets, based on plans included in the study. Across all participants, the all-in fee ranged from 0.28% of assets (the 10th percentile participant) to 1.38% of assets (the 90th percentile participant). Larger plans tended to have lower all-in fees.  

While the survey was not intended to provide a statistical representation of the defined contribution plan market, the survey respondents represent a wide cross section of plans. The 525 plans surveyed from January through August 2011 ranged from less than $1 million in assets (56% of plans in the sample) to more than $1 billion in assets (7% of plans in the sample), and from fewer than 100 participants (64% of plans in the sample) to more than 10,000 participants (8% of plans in the sample).  

The study report, Inside the Structure of Defined Contribution/401(k) Plan Fees, is at